While the U.S. implements potentially dramatic cuts to its defense spending growth, China is robustly increasing its military spending, which is officially set to grow at a clip of 11.2% to 670.2 billion RMB ($106.4 billion) in 2012. (This figure does not cover all of China’s defense-related spending, but then no nation’s defense budget does —including that of the U.S.) Defense dollars (or yuan) can be spent in many ways, though budget cuts are typically not an effective way to increase military power or credibility with potential adversaries. Beijing appears well aware of this reality.

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But even with this impressive expansion, China, like the U.S., is beginning to feel defense spending pressures—both in growth of mission scope, and in technology and personnel costs.

China’s growing global interests are driving the military to look increasingly “beyond Taiwan” and its immediate maritime periphery to inform its strategy and procurement. Meanwhile, China’s assertive behavior in the South and East China seas gives its neighbors strong incentive to hedge through military upgrades of their own and closer ties with the U.S. — at a time when China has no allies able to provide reliable security assistance. Each of these realities is likely to propel Chinese military spending.

China’s expeditionary capabilities will likely grow in coming years, as the number of Chinese citizens, investment and economic interests abroad rises steadily. The People’s Liberation Army’s naval forces (PLAN) have sustained successful anti-piracy deployments to the Gulf of Aden for more than three years now, with 11 task forces escorting more than 4,400 ships. While these anti-piracy missions cracked open the door, the Libya evacuation opened it more. Over time, the PLAN will likely seek to open it fully with a more sustained presence in the Indian Ocean region, and perhaps the Persian Gulf as well. Such efforts will not produce a high-end “blue water” navy (pdf) anytime soon, but they require investment now.

A more sustained Chinese presence in the Indian Ocean region will likely unnerve India and help reinforce a vicious cycle in which China’s rise and behavior provoke defense hardware upgrades and security realignments by neighboring countries – moves that will, in turn, help drive further defense spending by a China that feels “encircled.”

For budgetary purposes, building even a medium global expeditionary capability, such as the three or more aircraft carriers China could eventually add to its fleet, would require very substantial additional acquisitions of military hardware as well as outlays to support training with those assets and the logistics needed to support them when they are deployed.

In the wake of the deployment of the missile frigate Xuzhou and IL-76 aircraft to Libya to aid and rescue Chinese citizens trapped amid the violence there a year ago, senior PLAN and civilian leaders now recognize the utility of forward-deployed military assets for a country like China with growing global interests. This matters for budgetary purposes because once strong institutional constituencies exist for shaping a specific set of military missions and capabilities, a combination of inertia and ambition tends to drive additional deployments and the hardware procurement to support greater capability.

In terms of hardware, China’s military modernization appears to be focusing heavily on naval, space/reconnaissance assets and air power. On the naval side, Chinese shipyards have reportedly built four Type 071 amphibious warfare vessels, are engaged in series production of the Type 054 frigates that will constitute future Chinese task forces, and are preparing to build the new Type 056 corvettes that could become the PLAN’s key vessel for handling future South China Sea contingencies.

China’s build-out of the Beidou satellite constellation, which will provide an indigenous equivalent of GPS that the PLA could use to enhance its weapons targeting abilities, suggests that Chinese military leaders view their new ships, satellites and aircraft as part of an increasingly integrated war-fighting package. Beidou now offers service in China and aims to offer Asia-Pacific regional coverage by the end of 2012, with global coverage to be in place by 2020. China’s rapid pace of satellite launches, which tied the U.S. number in 2010 and surpassed it in 2011 (with 19 Chinese satellite launches), reflects strong growth in China’s space-based reconnaissance capabilities and hints that this area will remain a high priority in future military budget planning.

China’s air power is also growing rapidly, with progress on the new J-20 late-generation fighter suggesting that by 2020, China could field true 5th-generation fighter aircraft. To become a top regional air power and create a limited global expeditionary capability, the PLA Air Force and Navy will need more late-generation fighters like the J-10, J-11 series and J-20; aerial refueling tankers; airborne early warning aircraft; modern long-range bombers; and long-range air-launched precision guided munitions such as land attack cruise missiles. These areas, as well as military jet engine production, are likely to be high priorities in current and future Chinese defense investment.

China’s military modernization costs likely to rise substantially

The need for more technology-intensive weapons systems underscores a new reality for China’s military planners: While some items such as ships can be produced more cheaply in China than in Western countries, China’s cost advantages decrease significantly as military equipment becomes more technology- and materials-intensive and less labor-intensive.

This will be especially true in the aerospace sector. While exact costs are extremely complex to calculate, basic estimates are possible. China’s J-10 fighter, for example, probably costs roughly $28 million per aircraft. This is nearly as much as the F/A-18 C and D series and the Russian SU-34, which cost $29 million per unit and $36 million per unit, respectively, for aircraft that are in many ways substantially more capable than the J-10. The J-20, meanwhile, likely costs somewhere around $110 million per unit, less than the F-35 and F-22, but in the neighborhood of the estimated $100 million unit cost of the Russian T-50 late-generation fighter aircraft.

As costs for acquiring equipment rise, so do the costs for maintaining the new hardware, supporting sufficient training and paying the operators. Personnel, equipment and operational costs are all rising for the PLA, and there will be a limit to what can China can afford in the future.

Several major factors drive rising PLA personnel costs. The various branches of China’s military, which seek to increase retention and improve soldiers’ quality of life, must compete increasingly with the private sector for the smart, energetic people needed to use and maintain complex modern weapons in a more technology-driven environment.

PLA officers, for example, now bring home at least 5,400 yuan ($845) per month on average, a very competitive wage compared to Chinese state owned enterprise employees’ average monthly earnings of closer to US$626 (4,000 RMB).

We believe there is a real chance that the PLA will, more quickly than it expects, end up in a position where it is spending significantly more of its budget on personnel than it is on procurement. The U.S. military is challenged similarly, but the issue is even more pressing for China. The PLA is still struggling to create a force that has comprehensive technologies equivalent to what the NATO militaries had by the late 1980s, whereas the U.S. already has modern equipment, trains intensively and is weighing rising personnel costs against its desire for cutting-edge equipment for the future.

Thus, the challenge China’s leaders face with regard to balancing personnel, training, and equipment costs resembles that of the Chinese economy more broadly, which has become huge in absolute terms, but remains relatively poor in per capita terms. China’s defense “pie” is growing rapidly, but the cost of key ingredients is rising faster still.

Erickson

Collins

Andrew Erickson is a professor at the U.S. Naval War College and a research associate at Harvard’s Fairbank Center. Co-founder of China SignPost (洞察中国), he blogs at www.andrewerickson.com. Gabe Collins is a co-founder of China SignPost and is a J.D. candidate at the University of Michigan Law School.

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